Summary. Luxshare reported 2Q19 revenue/net profit growth of 88%/80% YoY, beating consensus and mid-point of guidance of 60-93% YoY, mainly due to stronger communication and consumer electronics, despite slightly lower GPM. Luxshare also guided a strong 9M19 NP with 50-60% YoY, implying 18-38% YoY for 3Q19 NP, in-line with our/consensus estimates. Luxshare is our A-share top pick given its share gain in iPhone/Airpod in 2H19E and major 5G beneficiary into 2020. Reiterate BUY with TP of RMB32.1 based on 25x FY20E P/E.
- Strong 2Q19 revenue across all segment. Luxshare’s 2Q19 revenue growth accelerated to 88% YoY, vs 67% YoY in 1Q. By segment, consumer electronics segment was the key driver with 99% YoY (78% of 1H19 sales), thanks to share gain in AirPod/acoustics/haptics and expanding offerings into LCP antenna and wireless charging modules. In addition, communications/automotive/other connectors also delivered robust growth with 52%/46%/164% YoY in 1H19E. GPM was flattish at 19.5% given higher mix of consumer electronics, while better operating leverage was partly offset by higher effective tax rate of 15.8% in 2Q19 (vs 9.3% in 2Q18).
- New projects on track to boost growth. We believe Luxshare will continue to broaden penetration into Apple supply chain in 2H19E ranging from Macbook/ iPad to iPhone and wearables (Watch/ AirPods). Despite iPhone weakness in 2019, we expect share gain, content growth to boost earnings growth in 2H19E. We also expect Luxshare to benefit from strong Airpod shipment and upgrade with 55mn/ 80mn/90mn units in FY19/20/21E.
- Outlook: major 5G beneficiary and limited trade war impact. Looking ahead, we believe Luxshare is well placed to capture 5G opportunities in 2020-21E given its solid product roadmap, including 1) massive MIMO and new compact filter-antenna and 2) optical solutions in datacenter/telecom equipment. In addition, Luxshare is aggressively expanding capacity in Vietnam in order to mitigate tariff impact in 2H19E/2020E.
- Reiterate BUY with TP of RMB32.1. We fine-tuned our FY19-21E EPS estimates, to factor in stronger revenue growth and higher tax rate. We maintained our TP 1, based on 25x FY20E P/E, 11% discount to 5-year average of 28x. Upcoming catalysts include launch of new Airpod and China 5G service launch.
